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Monday, February 11, 2013

Marussia is an economic sitting duck

This year, after the demise of HRT F1 team, the question of economic viability hangs over the Marussia Team. They are the only team on the official 2013 entry list that has yet to be offered a new Concorde Agreement deal. Marussia, Caterham and HRT F1 formed the “Column 3” group within the agreement whereby each were guaranteed an income of $10 million each year for a period of 3 years to help them establish themselves.

The 3 year period ran out at the end of the 2012 season and, with HRT F1’s demise and Caterham’s inclusion in the Column 2 group, which resulted from that team retaining 10th place in the Constructor’s Championship, Marussia are, to date, without any income from Formula One Management (FOM), the top ten finishers being the only recipients of the lucrative financial benefits which make up a large percentage of their annual income from the sport.

Marussia operates on the smallest budget of the remaining 11 F1 teams on the grid, estimated to be in the region of £38 million per annum ($60 million).

In general terms the operational budget of an F1 team tends to be split between sponsorship which brings in about 48% and the other 52% is brought in from that slice of F1 profits distributed to the teams by FOM based on their finishing positions in the World Constructors’ Championship. These figures appear to be borne out by the income generated by the sponsors of the team's two rookie drivers.

Marussia’s exclusion, due to their finishing position outside the top ten makes it likely that their operational budget is made up of sponsorship and the money brought in by their two paying drivers, Max Chilton and Luis Razia.

The MR02 was launched at Jerez on February 5th with few visible sponsors.

Maz Chilton brings a reported £5 million sterling while Luis Razia's sponsorship is reported as $15 million or £9.5 million sterling providing a total income for the team of around £15 million sterling.

In terms of Outgoings the team are reported to be paying McLaren and Williams some £6 million a year for the McLaren Applied Technologies technical tie-in/Windtunnel use and the Williams KERS system.

No figure exists for the Cosworth engine deal but this is likely to be of the order of between £5 - £8 million per year, leaving the team with a total remainder of the order of only £1-4 million to go racing, should they not have access to the remaining £20 million needed to run the team.

Without income from FOM they are reliant upon being able to increase their existing debt, which appears to be growing year on year.

It was reported in the Guardian Newspaper in October last year that Marussia had recorded a loss of £49 million over the course of the 2012 season, bringing their total debt to around £80 million. That article valued the team at around £45 million, meaning that, even should the team be sold its sale price would not be able to service the debt.

It was further reported that to the end of 2011 the turnover of the team from sponsorship and prize money declined by 5% to £28.6 million while the running costs rose by 11% to £70 million. The gap between income and outgoings reaching £41.4 million.

While they appear to have cut costs from 2011 to much reduced levels in 2013 the fact is that the debt mountain is growing and will eventually become unsustainable without a serious cash injection.

LDC, one of the names visible on the front wing nose section of the MR02 stands for Lloyds Development Capital, a branch of Lloyds Banking Group which owns 29.4% of the team. In 2011 LDC loaned the team £38.4 million, bringing its total loans to the team to £77.7 million. £61 million of that fell due at the end of 2012. The LDC shareholding is only worth £13.2 million based on the estimated value of the team.

If the team had finished 10th in the WCC in 2012 they would have been in line for a payout of around £25.6 Million from FOM. The fact they finished 11th meant that Timo Glock had to be replaced (a reputed saving of £1.9 million per year)

All that is clear at the moment is that the team is working under a massive level of debt; debt which the team cannot repay without some form of cash injection. Their debtors may hold off on calling their money in until they see how the team do in the early races of the season but, if the team do not begin to achieve results soon, how long before their banker’s patience runs out?

It seems unlikely that the team is going to make the leap up the grid in 2013, even though there is no question but that the MR02 looks like a much improved design over last year’s car and has KERS for the first time. If they are not on the pace of the Caterhams by the time they reach Spain serious questions will have to be asked as to the teams future.

The bank will only bankroll the team for so long on the strength of a shareholding which is not worth the money being provided. Remember Lloyd’s Banking Group is owned by the British Government and I’m pretty sure the Government wouldn't enjoy answering questions as to why they are financing an ailing Formula 1 team to the tune of £80 million.